High yields boosted buying, and Japan's two-year treasury bond auction “passed the customs steadily”

The Zhitong Finance App learned that demand for the two-year government bond auction held in Japan on Wednesday was stronger than the 12-month average due to high yields attracting capital to enter the market.

According to reports, the bid multiplier rose from 2.97 in the previous auction to 3.89, with a 12-month average of 3.75. Another sign of strong demand is that the tail spread — that is, the gap between the average price and the lowest bid price — narrowed to 0.014, compared to 0.034 last month. After the tender results were released, the decline in Japanese bond futures narrowed.

Miki Den, senior interest rate strategist at SMBC Nikko Securities, said that thanks to the high yield, the auction achieved steady results. She added that the market is closely watching the monetary policies of Japan and the US, and the US employment report released later this week is the core focus.

Notably, earlier, Japan's latest round of 40-year treasury bond auctions also attracted the strongest demand since 2020.

Affected by this, the two-year yield, which is sensitive to monetary policy expectations, fell 1.5 basis points to 1.945% on Wednesday. It hit 1.975% earlier this week, the highest level since 1995, and the 10-year yield also fell from a 30-year high to around 3.08%.

At the time of this auction, the market is increasingly speculating that the Bank of Japan may raise interest rates again as early as next month. Earlier this month, the bank decided to raise the benchmark interest rate to its highest level in 31 years. Kazuo Momma, the former head of monetary policy at the Bank of Japan, also expressed this expectation in an interview.

Strategist Mark Cranfield said, “The demand for today's two-year Japanese treasury bond auctions is higher than the one-year average, and there is no repeat of the bad auction in August. This result will be a source of relief for Japan and the G-10 fixed income market as a whole. Although the yield has yet to break through 2%, it is enough to attract investors to lay out a short-term interest rate curve. Furthermore, Mitsubishi UFJ Morgan Stanley Securities undertook 22% of the bonds, which should guarantee trading activity in the secondary market.”

Overnight index swaps show that the probability that the Bank of Japan will raise interest rates in October is about 23%, while the 25 basis point rate hike by December is almost fully priced.

Meanwhile, Japanese and US policymakers have stepped up verbal intervention since last week to stop the yen from falling, which also helped support market sentiment.